TC-IT 13472 SG – 18 November 2014
26 November 2014
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)
This is an appeal by the taxpayer to the Gauteng Income Tax
Court in respect of the taxpayer’s 2008 year of assessment where SARS
disallowed the taxpayer’s reduction of the proceeds from the sale of shares.
The appellant, Mr Z, acted as agent for A company in
November 2003 in respect of an offer to purchase received from F, in respect of
shares held in BCD (Pty) Ltd. A sale agreement was concluded and the 47,3 per
cent interest was sold to F on the understanding that A Company would have no
minority shareholder protection. Mr Z
was also a shareholder in BCD (Pty) Ltd and in August 2007, also sold his
27,005 per cent interest in BCD (Pty) Ltd to F for R841 655 833.
During the relevant offer to purchase in 2003, Mr Z had
failed to disclose to A company that F would have extended minority protection
rights to it and that it was therefore not compelled to sell its minority
shares in BCD (Pty) Ltd company to F. A company instituted a damages action
against Mr Z in October 2007 and they finally settled the dispute and
obligation by 31 October 2007 for an amount of damages of
R694 888 271, which was also made an order of court.
For his 2008 tax return, Mr Z in calculating the capital
gain on the shares that he sold in BCD Pty Ltd, deducted the compensation
payment made to A company from the proceeds received from F and only indicated
the net amount of R216 218 233 as the proceeds. This was done
following accounting and tax advice that was given to Mr Z that paragraph
35(3)(c) of the Eighth Schedule to the Income TA Act (No. 58 of 1962) allows
for the proceeds to be reduced by any amount that was reduced from such
proceeds as a result of any other event.
During December 2012, SARS audited Mr Z and raised an
assessment for the amount deducted from the proceeds. In addition SARS raised
an understatement penalty in terms of section 223 of the Tax Administration Act
28 of 2011 of 75% which equated to R46 907 820, on the basis that the
taxpayer had no reasonable grounds for the tax position taken. SARS also raised
interest on both amounts payable to SARS.
SARS’ grounds of assessment was that the words any other event must be interpreted in
context of the more specific stated matters in that paragraph and be restricted
to any other events that are similar to the specifically stated events.
Reduction of proceeds
The court first dealt with the submission on whether only
the difference in amounts was the actual amount received and whether the
compensation payment was causally linked, which the court concluded that it was
not and was in respect of two distinct matters.
The court further concluded that paragraph 35 is unambiguous as to
whether the appellant received or accrued the full sale proceeds of R841m and
the obligation to pay the compensation did not result in a lesser amount being
received for the sale of shares as contended by the taxpayer.
The taxpayers second submission was that the full amount
received or accrued could be reduced in terms of paragraph 35(3)(c) as the 2003
sale of shares was "any other event” which could reduce the proceeds of the
2007 sale. SARS submitted that the ejusdem
generis rule applied and that the general term "any other event” was
restricted by the less general wording in paragraph 35(3)(c). The court agreed
with the following SARS’ citations in point from the Commissioner of Customs v Joffre 1934 WLD 8 at :
necessary to consider how the ejusdem generis rule is applied…
...But the general
word which follows particular and specific word of the same genus nature as
itself takes its meaning from them, and is presumed to be restricted to the
same genus as those words; or, in other words, as comprehending only things of
the same kind as those designated by them, unless of course, there be something
to show that a wider sense was intended.”
and at 
"a definition given by
Lord Campbell of the ejusdem generis rule – "That where there are general words
following particular and specific words, the general words must be confined to
things of the same kind as those specified.”
SARS submitted that on this basis the words "any other
event” should be limited to the two specific groups of things specified in
paragraph 35(3)(c), namely to changes to the disposing agreement and secondly
to the release from the obligation to pay. The court at  agreed with SARS’
submission on the law and concluded that the taxpayer could only have relied on
other events that fell within these two categories, which the payment for the
breach of the fiduciary capacity did not.
Penalties and interest
The court accepted the common cause position that the
provisions of the Tax Administration Act would apply retrospectively to this
matter and in specific section 221, in respect of understatement penalties. The
SARS had imposed a penalty of R46m on the basis that the behaviour applicable
to the taxpayer was that he did not take "reasonable care” or that "no
reasonable grounds exist for the tax position taken”.
The court in
addressing the matter relies on the following comment in Juta:
"The test as to whether the grounds are reasonable, is objective, in
relation to the actions of the taxpayer. A mere subjective belief by the
taxpayer that a deduction should be allowed, without taking advice on the
matter, is unlikely to be reasonable. On the other hand, the reliance by the
taxpayer on expert advice, even if this is wrong, will on most cases constitute
reasonable grounds for the action taken.”
On this basis the court concluded that the taxpayer had
acted reasonable as he did in fact take advice from specialists. The court
found that the behaviours applied by SARS were therefore not applicable but at
most a substantial understatement as it was common cause that the relevant
understatement fell within that definition. The court, however, found that the
taxpayer had no extenuating circumstances and would not be entitled to further
remittance under section 270(6D).
In respect of the interest levied in terms of section
89quat, the court held that subsection (3) provides the Commissioner with a
discretion and that based on the finding of the reasonableness of the
taxpayer’s actions, such interest should also be remitted..
The taxpayer’s appeal against the assessment was dismissed,
the understatement penalty was reduced to 10 per cent and the interest was
remitted in full on the basis that his actions, based on the facts, were
Please click here to view judgement.